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— "We want to look at ways San Diego can actually start producing its own electricity," says Shames's colleague Jodi Beebe, "so we don't have to rely on this complicated infrastructure. There are so many other types of alternatives that could be looked at that currently are not. There has to be a way for San Diego to create more electricity here, instead of having it imported from someplace else. We're not there with fuel cells yet, but don't close that door."

Shames's report goes farther. "SDG&E and its Fortune 500 holding company, Sempra Energy, have a figurative stranglehold on the local energy market...it is apparent that gas and electric rates [in San Diego] will be among the highest in the state within three years."

"That's just completely wrong," says Severin Borenstein, a business professor at U.C. Berkeley, director of the University of California Energy Institute, and a member of the PX's board of governors. "[Residential bills] were mandated to go down 10 percent, and they did go down 10 percent on January 1, 1998. [The rate] is going to go down further, but we're not sure how much yet. It would have gone down anyway. The reason prices were so high was bad investments and contracts that had been signed."

Those "bad investments" were alternative power sources that the government pushed power companies like SDG&E to invest in during the '70s and '80s. The cost, Borenstein says, proved high, and the investments often environmentally unacceptable.

"In the case of San Diego, they had these contracts with independent generators that were signed under the PURPA [Public Utility Regulatory Policies Act] back in the 1980s [at] extremely high prices. The act's purpose was to get utilities to not generate all their own power. It was oriented to getting them to buy more environmentally friendly generation. Some of it was [natural] gas, some of it was wind, some of it was hydro, some of it was geothermal. San Diego also had part of the San Onofre nuclear-generating station. And that turned out to be way more expensive than anticipated."

Then, says Borenstein, the price of natural gas collapsed, making generation by any other means expensive by comparison. Peace's legislation allowed utilities to pass on to customers the "stranded costs" of those contracts with "competitive transition charges." That wiped out the 10-percent reduction in residential power bills.

But SDG&E has now sold off its interests in the San Onofre nuclear-power station and two other gas-fired generating plants, in part to meet deregulation requirements that utilities separate themselves from the power-generation business (though Sempra is building a power plant in Nevada).

"San Diego's [bad investments] were probably proportionately smaller than San Francisco's Pacific Gas and Electric and L.A.'s Southern California Edison's," says Borenstein. He's not surprised that with proceeds from the sale of its nuclear and other power plants, SDG&E is the first of California's "big three" utilities to pay off that debt.

So why has this good news gotten the PX's Jesús Arredondo -- and UCAN -- nervous? Because they worry that, led by SDG&E, the utilities could bust out and go back to their old bilateral dealings, once they've paid off their bad investments. If SDG&E decided to leave the California Power Exchange, and PG&E and Southern California Edison followed, the PX would look anemic. Despite the involvement of the 69 other companies (from California and seven other western states, Canada, and Mexico), Peace's baby may not survive abandonment by the "big three," which the PX says still serves 80 percent of California's electrical demand.

"[SDG&E] think they might be able to cut a better deal working with somebody outside of the power exchange," says Borenstein. "They have covered their stranded investments, but the law was unclear on whether that was sufficient for them to have the right to buy outside of the power exchange."

The good news, says Borenstein, is that SDG&E has been negotiating a deal they've submitted to the Public Utilities Commission for approval; it still involves them buying most of their power through the PX.

But for Shames, Peace's law leaves too much opportunity for utilities to get out of hand. And San Diegans, he says, are the test monkeys.

"San Diego is the first region in the state, and in the United States, to emerge from the transition to deregulated competition. No other utility will expose its customers to the unfettered prices of an electric market before 2001," he writes in his report. "The lessons learned in San Diego will determine whether California's experiment with deregulated electricity results in more competition and better service or a consumer nightmare of a stronger unregulated monopoly that is accountable to no one."

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